The ascendancy of corporate treasurers to the very heart of
corporates’ business strategy continues apace as
fluctuating commodity prices have resulted in treasurers
working more closely with procurement teams.

Branko Ilic, treasury and commodities business consultant at
OpenLink, says: "It is part of the reach for centralization,
seeing treasury merging with different functions. The treasurer
is part of the process now, with a seat at the table, and are
participating in decision-making process. They are in a
position to be able to evaluate risk and present the options
available."

Branko
Ilic, OpenLink

It is likely that the two departments (treasury and
procurement) are already working together, but commodity price
changes are deepening the conversation. Sander van Tol, partner
at Zanders, says: "As a best-in-class approach we see the
treasurer responsible for managing the commodity-price risk.
This can be achieved by full cooperation between treasury and
procurement. This cooperation is already there for working
capital management and counterparty credit risk on large
suppliers. Procurement should still be responsible for all
other aspects around commodity procurement."

Ilic says there is a lack of understanding within some
business on how exposed they are to changing commodity prices:
"Corporates are not always aware of how
commodity intensive their business is," he says. "Often
this risk is not being managed efficiently. Companies can be
vulnerable to the changing commodity price risk. The amount of
risk each client has is highly variable. Through greater
collaboration they are able to find the rates and exposures
that work in their favour."

Van Tol says: "
Treasurers should be involved in the procurement process as
they can quantify the possible impact of changing commodity
prices on the company in terms of cashflows and P&L
effects. Furthermore they can assist in hedging the commodity
price risk in the financial markets using derivatives or assist
in mitigating the risk by defining pass-through clauses for end
markets."

Despite the potential gains, Deloitte’s Global
Corporate Treasury Survey 2015 demonstrated that many
treasurers are unlikely to be spending much time worrying about
commodity-price changes. The survey found commodity-price risk
management tools were the least used on ERP systems, accounting
for only 7% of utilized system functionality.

A more hands on approach to commodities by corporates is
becoming a necessity as the makeup of the market changes, a
transformation that might leave treasurers without the advisory
base they might have previously depended on. Ilic says: "With
banks pulling out of commodities we’re seeing the
corporates needing to become savvier themselves. The banks
moving out of the market has created new opportunities for
different players and brokers to move in. When there has been a
change in the service provider it has meant the corporates need
to find a new way of running their business."

Peter Seward, vice-president of product strategy at Reval,
says the commodity-price
changes affect multiple areas that treasurers will have to
factor in to their cash planning.

"Volatility in commodities creates uncertainty in risks
across the board – not just in commodity prices," says
Seward. "FX risk, for example, is often associated with
commodity volatility, so there can be an impact on how
treasurers manage their FX risk as well. Overall, the
correlations between commodity-price risk and other risks can
flow directly to greater variability in corporate earnings. A
worst-case scenario can be worse than previously expected."

A more detailed dialogue might also stop the procurement
teams from taking too many risks, given volatile FX and
commodity

Sander van Tol,Zanders

prices. Van Tol says: "Based on our experience we see that some
procurement departments are taking bets and views on commodity
prices and use more proprietary trading like hedging
techniques, and stop-loss trading. We would classify this as
more adventurous hedging and is most of the time not in line
with the more prudent approach treasurers use for hedging FX,
interest or financial counterparty risk."

The benefits of greater collaboration between treasury and
procurement are two-way. As Seward notes, the overview
treasurers have of the whole business can better inform the
operations of the procurement team: "Typically, procurement is
focused only on commodity hedging, but because treasury is
aware of all financial risks and can quantify volatility and
the correlations between commodity-price risk and other
exposures, procurement can better appreciate the impacts their
decisions may have on corporate earnings, not just on
hedging.

"A better understanding of the context can lead to more
effective hedge policies. For example, despite the volatility
in FX and commodities over the past 18 months, changes in
correlations that offset the impacts of that volatility would
have a net effect of no increase in risk, eliminating the need
to make a change in policy, which otherwise would have been
made based on incomplete analysis."

Corporate treasurers are increasingly capturing the
attention of the C-suite, given the increasing importance of
cash management – as well as liquidity and policy
planning – in delivering business goals. With
regulation assuming ever-more importance, treasurers need to
ensure business operations comply, as well as the banking
relationship. Their
closer collaboration with the M&A teams has also helped
with attaining necessary financing.

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